Byron-based Pyrotechnic Specialities Inc. and the U.S. Army Contracting Command reached a verbal settlement Tuesday in a contract dispute over millions of dollars.

The settlement amount, expected to be hashed out at a later date before the Defense Contract Audit Agency, cannot exceed $4 million under the agreement, PSI’s CEO David Karlson said.

PSI manufactures munitions for the government and law-enforcement agencies.

The settlement averted what could have been an eight-day trial before an administrative law judge for the Armed Services Board of Contract Appeals. The board agreed to have the case heard in a borrowed federal courtroom in Macon.

The trial was to determine whether PSI was entitled to expenses and losses from what it alleged was the improper termination of Army contracts for the manufacture of “trip” flares and “white star” flares.

PSI contended that it lost the contracts from fallout from an April 2008 federal indictment. Those charges were later dismissed for insufficient evidence. The indictment alleged that PSI defrauded the government by relabeling and selling defective “flash bang” or “stun” grenades to the FBI.

Basically, PSI argued in its pretrial position paper that the government had been trying to put the company out of business based on an inspector’s erroneous belief that PSI had engaged in fraudulent behavior in relation to the grenades. PSI accused the government of conducting overzealous inspections that resulted in production delays. As a result of that and other alleged activity by the government, the Army then improperly terminated its contracts in relation to the flares, PSI alleged.

But the government countered that while PSI blamed the government, the loss off the contracts was the company’s own fault. For example, the government alleged that systematic failures in PSI’s own quality management system resulted in the company’s production problems and delays. The government systematically denied other allegations in its position paper.

Both parties and their witnesses had assembled for the trial Tuesday before Judge Diana Dickinson of the Armed Services Board. However, the court remained in recess for most of the morning after PSI and government attorneys requested time to talk.

The trial had been scheduled to start at 9 a.m., then 10:30 a.m. and next pushed back to 1 p.m. When all had assembled for the afternoon, attorneys met briefly with the judge. Court then dismissed for the day.

U.S. Army Capt. Edward Ahn, the lead attorney for the government, said afterward that he could only say that the government and PSI had reached “an agreement in principle.” He declined further comment.

John Draughon of Macon, one of the attorneys representing PSI, said afterward that a settlement contract between PSI and the government was being drawn up.

Draughon said he expected the signing of the contract by both parties to be only a formality. The contract was expected to be finalized and signed by Wednesday.

The agreement settles only the dispute over the “trip” flares contract, Karlson said. He said the agreement calls for a cap amount of $4 million. PSI will next present its estimated losses before the Defense Contract Audit Agency, which will determine the amount of the settlement, Draughon said.

“It’s good for us,” Karlson said of the settlement. “We’ve had a cloud hanging over us for a long time.”

Draughon said he expects that PSI and the government also will be able to reach an out-of-court settlement on the remaining contract dispute over the “white star” flares.

The combined amount originally sought by PSI for both lost contracts was estimated at $5.6 million, Draughon said previously.